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California Supreme Court Upholds Bonus Plan's Forfeiture

Can a bonus plan provide for forfeiture of unpaid bonus if an employee voluntarily leaves employment or is fired for cause? Yes, said the California Supreme Court. Money quote:

“nothing in the public policy of this state concerning wages . . . transforms [a] contingent expectation of receiving bonuses into an entitlement.” (Neisendorf, supra, 143 Cal.App.4th at p. 522.) Only when an employee satisfies the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon resignation or termination). (Ibid.; Lucian v. All States Trucking Co., supra, 116 Cal.App.3d at p. 975 [“An employee who voluntarily leaves his employment before the bonus calculation date is not entitled to receive it”].)

Here, of course, Schachter voluntarily terminated his employment before his restricted stock fully vested. By the terms of the Plan, and Schachter’s own concession, he is not entitled to those unvested shares of restricted stock. Having elected to receive some of his compensation in the form of restricted stock, a transaction he was aware carried risk as well as the potential for reward, Schachter cannot now assert that he should have been paid in cash that portion of his compensation he elected to receive as restricted stock.[1] As the company persuasively argues, Schachter’s “bargained-for ‘wages’ have been paid in full. He received all of his promised cash compensation, received immediately exercisable voting and dividend rights in the restricted stock, and was awarded contingent rights of full ownership in that stock. The only thing that has not been ‘paid’ is something Schachter never ‘earned’ — fully vested [company] stock. Schachter therefore has no claim under [section] 201 or [section] 202.” [1]

So, the Supreme Court has blessed bonus plans that require the employee to remain employed. However, the Court did note that Citigroup's plan would have paid certain compensation to Schachter if he has been fired without "cause," e.g., laid off. The Court approved this formulation, noting that employees terminated "without cause" may not be be deprived of the benefits of their contract. This was all "dicta" so it should not have much force. But the DLSE will rely on it to bolster its own enforcement position.